Bonus clawbacks and take-home-pay: Government to standardise executive pay reports

Proposed laws standardising how executive pay is reported have been welcomed, with reservations, by remuneration and corporate governance experts.

According to the Australian Financial Review, the government plans to introduce new legislation on executive pay later this week.

The proposed legislation has two strands: firstly, to require companies to disclose take-home pay for their executives, and two, to require companies to have policies in place to claw back bonuses in situations where financial accounts are misstated.

Many companies already do one or both of these things, says remuneration expert Michael Robinson of Guerdon Associates. He says many large companies report more than is required by law, including take-home pay, in an attempt to make their reports more understood.

“There are statutory tables required by in the corporations act that require pay to be disclosed in accordance with accounting standards. This has been very confusing. To try to get over this confusion, most large companies show a non-statutory table showing effective take-home pay,” Robinson says.

“But the way they disclose that take-home pay does vary across companies – there’s no standardised way, and many companies have slight variations in how they do it. That does make it confusing.”

The changes mooted today were proposed in February in response to the Corporates and Markets Advisory Committee’s (CAMAC) 2011 executive pay disclosure report.

CAMAC recommended executive pay be broken up into three strands when it is disclosed:

• Realised pay – ie what an executive was paid this financial year that they took as take-home pay
• Crystallised pay – ie anything granted in past years that was received this year
• Future pay – ie anything granted this year that will crystallise next year, with a deduction for the risk that will not be achieved.

A reliance on accounting standards made reports confusing for investors, CAMAC said in its recommendations, leading it to suggest the use of such standards no longer be required in remuneration reports.

But Tim Sheehy, CEO of Chartered Secretaries Australia, is dubious of whether reports are too confusing for investors.

“Yes, remuneration reports are complex. But some senior executives have complex arrangements which are hard to put out there in a simple way.

“The proxy firms and so forth, they have the expertise to dissect these reports. Yeah, they’re complex, but the issue is complex.”

The other aspect of the proposal, clawbacks of bonuses should financial accounts be severely misstated, is already required of financial institutions under ASIC regulation. Standardising it in law would require it of all companies. The proposal also recommends companies disclose such clawback policies, which they are not currently required to do.

Sheehy says his association welcomes the requirement of clawback provisions. However, he would prefer to see them enshrined in the ASX’s corporate governance guidelines rather than through legislation. “Legislation has to be so tightly defined that it only applies in a narrow range of circumstances, such as criminal fraud or clear material misstatement,” he says.

The proposed laws come on top of the two-strikes regime, introduced in 2009. Companies now have to put their executive remuneration report to a vote at their annual general meeting, with a dissenting vote of 25% or more in two consecutive years triggering a spill motion of the board.

Sheehy says that when he looks back at the second reporting season under the two-strike regime, it’s clear it has worked well. “Only a few companies have got a second strike. That shows that the majority who got a first strike went out and talked to their investors about their concerns. It’s achieving what it was meant to. The laws suggested today will have vastly less of an impact by comparison.”

Robinson says that while there are positive aspects to the laws, he’s not sure whether more legislation is needed in this area.

“It’s one more thing the board have to concern themselves with. There are very significant and material matters that have a much greater impact on shareholders they have to address. Changes like this mean they’ll have less time to address them.”